Newsletter · · Ashutosh Agarwal

The Dollar Roared Back and EM Carry Is Cracking - EM FX - Week of July 10, 2026

EM FX for the week of July 10, 2026. The dollar index pushed back above 100 with real US yields at multi-year highs and trend-followers flipping long, and the podcast desks flipped from buying the EM dip to minding the exits as Latin America, June's carry champion, started to crack.

EM FX

Week of July 10, 2026: The Dollar Roared Back and EM Carry Is Cracking

Well, that didn't take long. A week ago the FX crowd on the podcasts was busy writing the dollar's obituary and telling you emerging-market currencies were the trade of 2026. This week they spent most of their time explaining why the dollar just came storming back off the mat, why the market has flipped from betting the Fed will cut rates to betting it might actually hike, and why the same emerging-market currencies that were the darlings of June are starting to wobble. When the story turns this fast, that turn is the story.

The short version: the U.S. dollar index is back above 100, real (inflation-adjusted) interest rates in the U.S. are at multi-year highs, and the trend-following funds that chase these moves are flipping to "long dollar." That is a tightening vise for anyone holding higher-yielding EM currencies for the carry, the strategy of borrowing in a cheap, low-rate currency and parking the money in a higher-yielding one to pocket the interest gap. This is not yet a rout. But the tone on the podcasts we follow shifted from "buy the dip in EM" to "mind the exits," and a couple of the sharpest voices think it's only getting started.

TL;DR

  • The dollar is back on top. On Bloomberg, BMO's chief FX strategist says the dollar index is heading for 103 this quarter and that the trend-following funds are only now flipping long, the fuel that tends to extend these moves.
  • The market has repriced the Fed from cuts to hikes. A U.S. 2-year Treasury yield near 4.15% versus a Fed policy rate near 3.5% means traders now expect a rate hike, possibly as soon as September, the opposite of last week.
  • EM has lost its special status. As one strategist put it, even the currencies that traded on their own quirky stories for a year have "joined the monolithic dollar blob," and Latin America, June's carry champion, is "starting to crack."
  • The one nuance for the bulls: the "debasement trade" (piling into gold and out of dollars on debt-and-money-printing fears) looks washed out, which could cap how much further the dollar runs.
  • Asia's currencies are still the funding pool, not the destination. The Indian rupee is the best turnaround candidate for the second half, but only because of what its central bank is doing, not because the tide has turned.

What's New

The dollar is not just up, it's breaking out, and the robots are joining. The single most important read of the week came from Bloomberg Surveillance, where Mark McCormick, chief FX strategist at BMO Capital Markets, laid out an unambiguous strong-dollar case. With the dollar index back over 100 (he cited 101.1), he's been targeting 103 for this quarter and thinks the market is "finally catching up" to a call his team has pushed for months: "The Fed didn't need to cut. Now it's very arguable that the Fed does need to hike at least once." His logic is a clean stack: the dollar "wins on carry, it wins on economic performance, it wins mostly on equities, and it's on the right side of the terms-of-trade shock," referring to the U.S. being less hurt than Asia by expensive energy. His high-frequency growth indicators say the U.S. economy is outrunning every other major economy he tracks. And the kicker: the trend-following funds (the "CTAs," commodity trading advisors, which mechanically buy what's going up) "are the ones that are flipping long the dollar now. They're the ones that take us there." When those funds pile in, moves tend to overshoot.

"Even EM has joined the monolithic dollar blob." On Forward Guidance, veteran FX trader Brent Donnelly made the same point in his own vivid language. He argued there's very little that's "idiosyncratic" (currency-specific) happening right now: "If you look at dollar-Korea, which would generally be quite idiosyncratic, and you overlay it with euro-dollar, it kind of looks the same. Well, inverted." His punchline for EM investors: "Even EM, which was idiosyncratic for a year or so up until recently, has joined the sort of monolithic dollar blob. So even things like dollar-Brazil have been rallying," meaning the Brazilian real, one of the strongest carry stories of the year, is weakening against the dollar too. His explanation is all about rates: "We had a couple cuts priced in. Now we got a couple hikes priced in," which makes sitting in dollars that much more attractive, and pulls in the carry-and-momentum crowd plus the bond investors who'd rather just earn the higher U.S. yield.

Why the market flipped from cuts to hikes. Both Thoughtful Money, with macro commentator George Gammon, and the Morning Call panel put numbers on the repricing that's driving everything else. Gammon pointed to the 2-year Treasury yield trading around 4.15% while the Fed's policy rate sits near 3.5%, a gap that "means the market has gone from expecting a Fed rate cut to likely expecting a Fed rate hike," with the first hike pulled forward "from December to September." His read on the trigger: an oil-price spike feeding into inflation, forcing the Fed to lean hawkish even with unemployment stuck around 4.3%. On the Morning Call, policy analyst Henrietta captured the confusion honestly after a week of investor meetings in New York: "You can be in a room with folks who will say the Fed is absolutely hiking, it'll happen in July, and others who are saying no, we're still going to get three cuts." She flagged the calendar risks stacking up (a tariff update at midnight on July 23, the war, and a coming fiscal package) against patchy jobs data. For EM, the direction is what matters: higher-for-longer U.S. rates are the enemy of the carry trade.

The dollar's a magnet, and it's squeezing everyone else. On the Bloomberg Surveillance "Energy Shock" episode, Steve Englander, global head of G10 FX research for North America at Standard Chartered, made the most fundamental version of the bull case. His anchor is real interest rates: U.S. real yields "have moved up to the highest levels in recent years," and crucially "for good reasons." Channeling the economist Knut Wicksell, he argued high real rates that reflect a genuine return on capital attract capital: "The U.S. is like a hedge fund. We borrow from places that save and we invest it." That's a magnet for money, and it pulls it out of everywhere else. McCormick made the flip-side explicit: when the dollar goes up, "it's basically a sign the global economy is weak, rates are higher, liquidity is tighter... the Fed curve is basically going to impose this onto the rest of the world." His blunt conclusion, "Asian currencies remain weak," and higher U.S. yields become a tightening shock that hurts Japan, Korea, and the rest whether they like it or not.

Asia is the funding pool, and the rupee is the one bright spot, barely. The most EM-specific detail came from JPMorgan's At Any Rate EM podcast, where the bank's Asia FX strategist walked through why the region stays under pressure. His verdict on whether the worst is over for beaten-up Asian currencies: "The odds of a major turnaround are a little bit lower." The reasons are worth spelling out: energy-price risk is unclear and Asia runs energy deficits; any boost from cheaper energy gets swamped by tighter global financial conditions; and "cheap RMB valuations and China's excess capacity continue to be a headwind for the region." The takeaway: "Asian currencies continue to make great funders," the cheap currencies you borrow in, not the ones you invest in. Within that, the Indian rupee "probably represents the best chance of a turnaround in the second half," on the back of measures India's central bank (the RBI) has announced to attract foreign capital. But he added two big caveats: the inflows are going straight into the RBI's reserves rather than the open market, so the RBI's hands-on management stays "very, very key," and its reaction function is "likely going to turn a lot more hawkish" now that "the political sensitivities around the weakness of the rupee have escalated in the last couple of months." Translation: the rupee's stability is a policy choice, not a market vote of confidence.

The Debate

This week the podcasts leaned heavily bearish on EM, so let's build that side properly and be honest about where the counter-argument still lives.

The bear-EM / strong-dollar camp (the loud side this week). Put the strategists together and you get a coherent, uncomfortable picture for carry. McCormick sees a broad dollar move with room to 103 and the trend-following funds only now piling in. Englander sees U.S. real rates at multi-year highs "for good reasons," acting as a magnet that drains capital from everyone else. Donnelly sees EM stripped of its special stories and dragged along by the dollar, with even the Brazilian real weakening. Gammon and the Morning Call panel supply the engine: a market that has repriced from Fed cuts to Fed hikes. The mechanism that makes this dangerous for carry is simple: when the currency you borrowed in (the dollar) rises and its yield climbs, the interest gap you were harvesting shrinks and your losses on the exchange rate can swamp it. And McCormick's most pointed warning was regional: the "multi-phase dollar" of weak Asia, weak Europe, but strong Latin America is breaking down, "LatAm starting to crack as well. So it's becoming a strong dollar move." That's the June carry darling losing its shine.

The bull-EM / soft-dollar camp (quieter, but not silent). The most credible push-back came, tellingly, from within the bull-dollar arguments themselves. Donnelly thinks the "debasement trade" (the crowded bet on gold and against the dollar, premised on runaway debt and money-printing) is exhausted: "The capitulation on the debasement trade is pretty much over," pointing to washed-out positioning, gold options skew, and even the fact that "nobody's trading [the gold ETF] GLD anymore on WallStreetBets." A washed-out anti-dollar trade can mean the easy money in the dollar rally is behind us. Englander added a discipline check that cuts the same way: he doesn't think "the market's as long dollars as the futures data suggests," because "there's still a reluctance to buy it," a rally without full conviction can reverse fast. And he flagged the timing trap that keeps sober bulls cautious: a geopolitical flare-up "can set you back, it can stop you out," so "you might have a dollar-positive view in three months, but you don't want to be stopped out in three days." What was not voiced on the podcasts this week: no EM central banker and no EM portfolio manager made the affirmative case that soft-dollar carry is about to reload. The classic bull pillars from prior weeks (high local real rates, managed regimes you can trade against) simply weren't argued this week. We're not going to invent that source.

The Trades in Play

The episodes actually pointed to expressions this week, so here's where they lead. The cleanest read is to respect the dollar's momentum rather than fade it: McCormick's 103 target on the dollar index, powered by trend-followers turning long, argues against catching the falling knife in high-carry EM right now. The regional tell to watch is Latin America: if McCormick is right that it's "starting to crack," the previously bulletproof real and peso are where the strong-dollar move shows up next, and Donnelly's observation that "dollar-Brazil has been rallying" is the early evidence. In Asia, the strategist framework is to use the low-yielders as funding rather than betting on their recovery, with the Indian rupee as the one selective long for the second half, but only as a bet on the RBI's management, and best expressed with the knowledge that the central bank, not the market, is setting the level. The nuance trade for the contrarians: if Donnelly and Englander are right that the anti-dollar "debasement" bet is washed out and real-money investors are still reluctant dollar buyers, then the dollar rally is maturing, and the highest-conviction fade is to wait for the momentum funds to overshoot before re-engaging EM carry, not to short it into strength today. And Korea stays the standout risk-off tell (see below), not a place to reach for yield.

Read-Throughs

A stronger dollar and higher U.S. yields read straight through to the EM debt ETFs: both the hard-currency (EMB) and local-currency baskets face a double hit as spot currencies soften and the U.S. rate anchor rises; this is the opposite of the total-return tailwind the carry crowd enjoyed in June. For the regional equity funds, McCormick's "LatAm cracking" call is a caution flag over Brazil's EWZ and Mexico's EWW, which had been riding the carry-and-commodity story; India's INDA sits on firmer ground given the rupee's the best turnaround candidate, but that rests on active central-bank management. Korea's EWY is the one to keep front-and-center for the wrong reasons: the Morning Call panel flagged the KOSPI as choppy and a classic leading indicator when markets get frothy (they noted it rolled over months ahead of the rest of the world in 2000), with Samsung earnings and the new SK Hynix ADR listing as this week's memory-chip flashpoints, and won volatility tied to the same wire. On commodities, the JPMorgan credit strategist noted Brent crude has struggled to break above 80 and sits below the bank's own forecast, with the Middle East "faded into the background" (Englander), a softer-oil backdrop that's a mild relief for energy-importing EMs even as the broad dollar overwhelms it. And the euro cycle still anchors Central Europe's currencies (Poland, Hungary, the Czech Republic), but those didn't get a fresh airing on the podcasts this week, so the read there is unchanged rather than new. Net: the broad dollar regime is once again the whole ballgame, and this week it turned back in the dollar's favor.

What Changed

This is the week the narrative flipped. Seven days ago the podcasts were near-unanimous that the dollar had peaked around 101.80 in late June, that the Fed's rate-hike repricing was "over or nearly over," and that EM carry was reloading on a softening dollar. Every one of those pillars was challenged this week: the dollar index is back over 100 and being talked toward 103; the market has repriced from cuts to hikes, with the first move pulled forward toward September (or, some argue, July); and the strategists now describe EM as having lost its idiosyncratic shine and rejoined a broad dollar move, with Latin America (last week's highest-conviction sleeve) specifically called out as "starting to crack." The one genuinely new supporting nuance for the EM bulls is the growing sense that the anti-dollar "debasement" trade is exhausted, which could cap the dollar's upside from here. Also new versus prior weeks: a concrete, if still policy-dependent, bull case for the Indian rupee built on the RBI's capital-attraction measures, a thread that had been essentially absent. Quiet again this week: the South African rand, the Turkish lira, Central Europe's currencies, and any dedicated Mexican peso or Brazilian real central-bank coverage, none got a real airing, so treat those threads as dormant, not resolved.

A final, clearly-speculative footnote, kept separate from the strategists above: on Tom Bilyeu's Impact Theory, the host walked through the theory that China is building a physical-gold settlement system: Shanghai for pricing, Hong Kong as the "front door," with Hong Kong's vault capacity supposedly expanding roughly tenfold from around 200 tons toward 2,000 tons, and mainland banks shutting retail paper-gold trading around July 24, as a step toward eventually anchoring the yuan to gold and chipping at the dollar's reserve status. This is pundit speculation, not operator or strategist analysis, and it's a long-horizon narrative rather than a tradable EM FX view this week. We flag it only because the yuan's global ambitions are a slow-burning backdrop to everything in this letter, but nothing here should be read as a near-term currency call.